Difference between Proprietorship and Partnership Firm for Startups

Introduction If you are planning to start a new startup, then you have to keep in mind that your business will benefit in what form of business.Choosing the right...

Introduction

If you are planning to start a new startup, then you have to keep in mind that your business will benefit in what form of business.Choosing the right form of business is very important because this will give you some advantages and Disadvantages so it is very important to select correct form of business. During incorporation of business you can form your business with Sole Proprietorship or Partnership Firm. Both are have some similarity like easy formation, less compliances and simple registration but there are some differences, you should compare between these two so you can find better option for your business. This Article talks about differences between Proprietorship and Partnership Firm.

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What is Sole Proprietorship?

Sole Proprietorship Firm can be incorporated by one Person only. This is the oldest forms of business where business incorporated by only one person. Owner of the firm is sole decision maker in the firm and business carried by only one Person. The Proprietor uses his own finance, skills, experience, and Knowledge to operating the business on his own. There is no formal registration required for Sole Proprietorship but you can register your Sole Proprietorship Firm Registration under Shop Establishment act or under GST. If you want to secure your legal rights then you should register your Sole Proprietorship with Shop Act License and GST. You can also register your business under Udyog Aadhar, this is issued by Ministry of Micro, Small and Medium Enterprises.Registration is important because in future you can avail benefits from the government schemes and you can secure your business by registering it.

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What is Partnership Firm?

Partnership Firm is a form of business where Firm can be incorporate by minimum 2 people and it does not require minimum capital contribution from partners according to laws. Partnership Firm governed by the Partnership Act, 1932. In simple words Partnership means Partners shares the profit and loss according to their Partnership Agreement. Incorporation of Partnership Firm is very easy and simple, partnership firm can be incorporated by minimum 2 persons. Partnership Firm Registration is not mandatory but Registration will give you security under the laws.

Process of Registration is very simple, first you have to choose your partnership name and it should not be copied from other business entity. Then you have to make a partnership deed/agreement, this agreement should contain the all details of partnership firm and its partners. Partnership Firm will act accordingly their agreement. And important thing is this agreement should contain stamp and sing of all partners, and this agreement should be notarized. After making of deed you can go to the Registrar of Firms, where your Partnership Deed will be registered. It is optional, if you don’t want to register it, then your partnership firm can be incorporated by with Partnership Deed.

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What are the Differences?

  • It is not necessary to register both the partnership firm and sole proprietorship, but if you want to register your Partnership Firm then you can register the partnership firm with the Registrar of Firms according to Partnership Act whereas there is no formal registration process is given under any law for the Sole Proprietorship.
  • The main difference is Sole Proprietorship can be incorporated by only one person and cannot extend the member whereas Partnership Firm requires minimum 2 person for incorporation and more partners can be added.
  • Sole Proprietorship will be taxed as an individual whereas Partnership Firm will be taxed on the Tax rate of 30% on the firm’s Profit
  • Partnership Firm is governed by the Partnership Act whereas there is no specific laws on Sole Proprietorship.

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  • It becomes easy to bring capital in the business and bear the losses as there are more than 2 partners in a Partnership Firm, as they can share the Profit and loss but in case of Sole Proprietorship all burden on Sole owner, Sole owner have to bear all the loses.
  • In a Partnership firm it is easy to bring resources in the firm whereas it is difficult for the Sole Owner
  • In a Partnership Firm decision making is slow as compare to Sole Proprietorship because it takes time in partnership firm as everyone have different opinion in firm and takes time to reach the conclusion.
  • In the case of death of Sole Owner the Sole Proprietorship will be dissolved whereas in case of Partnership firm, partners can carry the business.

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Conclusion

If you are planning a startup then you should consider above given points because it is very important to choose correct form of business. As you can see that there are some differences between sole proprietorship and Partnership Firm, if you are single person in your business then you can opt the sole proprietorship and if there are more than 2 person then you can go for the Partnership Firm. So read carefully these differences and compare it so you will find correct option for you.

 

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